TaxTMI 
TaxTMI 
2019 (9) TMI 543
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....come Tax (Appeals) for Assessment Year 2007-08 and 2008-09 wherein too, identical disallowances made had been deleted and therefore, the learned Commissioner of Income Tax (Appeals) ought to have respectfully followed the same and as such, the disallowance so upheld is illegal, invalid and wholly unsustainable. 1.2 That the learned Commissioner of Income Tax (Appeals) has failed to appreciate that since Shri Anshuman Magazine as a managing director of the appellant company was to make extensive efforts to obtain and increase the business of the appellant company and devote extra time and as such it was resolved that Shri Anshuman Magazine be paid incentive in the form of commission at 30% of the net profits for each year after adding back depreciation, since Assessment year 2004-05, apart from the basic salary which stood allowed and accepted in preceding years. 1.3 That the learned Commissioner of Income Tax (Appeals) has erred both in law and no facts in recording various adverse inferences without granting any opportunity which are also contrary to facts on record, material placed on record and, are otherwise absolutely unwarranted. 3. Facts of the case, in ....
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.... by observing as under :- 4.3.1 I have examined observations made by the AO in the assessment order passed, submissions made by the appellant during the course of appeal, various evidences placed on record, various judgments relied upon by the appellant and also examined the facts of the case. The AO invoked the provisions of Section 36(1 )(ii) which provides that any sum paid to an employee as bonus or commission for services rendered is to be deducted in computing the total income, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission. 4.3.2 The appellant has relied upon the order of the Hon'ble Tribunal in the case of M/s Creative Travel (P) Ltd. vs. ACIT in ITA No. 190/D 2010 for Assessment Year 2006-07 dated 13.05.2011. I have examined this order deeply and in my personal opinion and with great respect to the Hon'ble ITAT, 1 find that facts of this case and those of the appellant are entirely different. In that case no doubt the other family members were also the shareholders and commission was paid to the director who was not having the substantial shareholding, whereas in the present case....
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....ssed dated 27.5.2003. which appears to have been passed with the sole intention to avoid payment of dividend distribution tax. A.3.41 have also examined various other case laws referred to by the appellant. However, in view of my above observations, since it is a case where the Director of the appellant company was holding almost entire shareholding of the appellant company, I find that the facts of the appellant company differ from those cases, and in the peculiar facts, the issue of payment of commission to the Managing Director Shri Anshuman Magazine who held 99.99% shares when such resolution for payment of commission was passed, need to be examined considering those circumstances. Therefore, with great respect to the Hon'ble 1TAT. I am of the personal opinion that this fact escaped the attention of the Hon'ble I I AT. while deciding the issue in A.Y. 2007-08 and A.Y. 2008-09 in the appellant's case. Further, in para 10 of their order dated 07th March, 2016 for A.Ys 2007-08 & 2008-09 in the case of the appellant company, Hon'ble ITAT have inter-alia observed as follows:- " ..................... It is noted that the A.O. proceeded to make disallowance on in....
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....uld have been passed to him as dividend and in that case the appellant company would have paid dividend distribution tax on such profits earned, and profit/taxable income of the appellant company would also have further increased by an amount of the so called commission paid to Mr. Anshuman Magazine. However, in order to avoid dividend distribution tax, under the guise of commission paid as per resolution passed, the appellant company has avoided payment of dividend distribution tax. Commission paid to Shri Anshuman Magazine is with the sole intention to reduce the income of the company and to avoid dividend distribution tax. 4.3.7 Provisions of Section 36(1)(ii) were brought on to the statute to prevent such diversion of profits to the shareholders who are other wise to get the same as profit / dividend by virtue of being shareholders of the company. In the present case also the issue is of allowability of commission paid to an employee (director who is also shareholder) as per provisions of section 36(1)(ii) of the Act. In the present case before me. Mr. Anshuman Magazine is not only Managing Director/employee of the appellant company but is also the shareholder in the a....
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....mbers / shareholders as bonus or commission instead of dividends. Therefore, what is to be seen is that when such bonus or commission is paid to an employee who is not to get the same as profit or dividend, then deduction u/s 36(1)(ii) shall be allowed, otherwise not. 4.3.9 However, in the present case before me. if the sum had not been paid as bonus or commission to Shri Anshuman Magazine, in that case since he was not only the employee but also a shareholder, he would have got that as a profit or dividend. Therefore, provisions of section 36(1)(ii) are clearly attracted in the present case and the amount paid to him as commission should not have been allowed u/s 36(1)(ii) of the Act. 4.3.10 It is also a matter of record that appellant company has paid substantial amount as commission to one of its directors Shri Anshuman Magazine. For this the appellant has relied on the Board resolution passed dated 27.05.2003 (PB 4) which reads as under:- "RESOLVED that pursuant to Article 24 of the Articles of Association of the Company and applicable provisions, if any, of the Companies Act, 1956, Mr. Anshuman Magazine be and is hereby appointed as the Managing Dire....
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.... since there is no difference in maximum rate of tax chargeable in the case of appellant company or in the case of the director Shri Anshuman Magazine, since the tax bracket is same. But the facts are somewhat different. By showing payment made to the Managing Director as commission, appellant company has avoided the dividend distribution tax which would have been paid in case no such expense had been paid/allowed, as in that case profit would have increased, and the tax which is claimed to have been paid by Shri Anshuman Magazine, would have been paid on increased income (actual income) of the appellant company. In addition the increased profits distributed as dividend would also be subjected to dividend distribution tax. In the present case, by passing such a resolution and showing that it is commission for the performance of the director is just a corporate veil, whereas the fact is that the performance achieved is not because of one person but is as a result of the team work of manpower employed in the business. Mr. Anshuman Magazine would have received almost the same amount as dividend at least upto A.Y. 2007-08 which has been given to him by way of commission, but in that ca....
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....,18,927 Share of Anshuman Magazine 6,31,96,543 24% 6,64,65,442 Amount given to Mr. Anshuman as Commission and incentive Difference which could have been allowed as expenses in the hands of the company (Even this was not to be paid as commission since the resolution passed only for five years) 3268899 4.3.16 I further find that in the present assessment year under consideration the profits of the appellant company are substantially reduced, which have come down to Rs. 26.74 crores as compared to immediately preceding year wherein the profits are shown at Rs. 37.06 crores despite increase in turnover from Rs. 243.14 crores to Rs. 280.63 crores. No material regarding the qualifications of Sh. Anshuman Magazine and the efforts made by him to increase the profitability of the company has been adduced by-the AR of the appellant. Therefore. 1 do not find any force in arguments of the appellant company that the increase in turnover or profits is as a result of Mr. Anshuman Magazine, for which expense purported to be commission paid to him is claimed, and therefore, the addition made b....
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....f Paper book) i) 2003-04 25,00,000 74,22,460 143 (1) ii) 2004-05 1,19,48,350 1,82,95,160 143 (3) (93) iii) 2005-06 1,91,75,160 2,69,01,560 143 (1) iv) 2006-07 3,81,76,000 4,72,10,880 143(3) (98) v) 2007-08 2,89,55,000 4,07,24,000 143(3) vi) 2008-09 6,47,27,888 7,67,27,888 (168-171) 143(3) (103) vii) 2009-10 5,44,65,442 6,62,49,942 (172-190) 143 (3) (105) (Issue under consideration) viii) 2010-11 4,01,84,983 5,19,68,983 9. Relying on various decisions he submitted that once taxes have been paid by the director on the income claimed as expenditure by assessee company, no disallowance is permissible validly under the Act. For the above proposition, he relied on the decision of Hon'ble Karnataka High Court in the case of CIT Vs. Swadeshi Internationals reported in 261 Taxman 430. Relying on the decision of Hon'ble Supreme Court in the case of DCIT Vs. Patel Alloy Steel (P) Ltd. reported in 262 Taxman 166 he submitted that in absence of disallowance made in the preceding years and no change in facts and law, no disallowance could be made in the instant year. ....
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.... the preceding assessment year, deduction claimed stands allowed even by the Hon'ble Tribunal and by the learned Commissioner of Income Tax (Appeals). He submitted that in the succeeding year also, identical claim of incentive paid has been allowed as such in assessment framed under section 143(3) of the Act. He submitted that the observation in para 4.3.4 (page 23 of order of CIT(A) that factum of passing of resolution on the date when Sh. Anshuman Magazine held 99.99% shareholding and escaped attention is wholly misconceived. There is no justification to proceed on such a presumption. In any case, having not filed an appeal against the order of Hon'ble Tribunal, the conclusion is wholly misconceived. Referring to the order of CIT(A) he submitted that it is also held by the learned CIT(A) that the resolution is upto 31.5.2008 and therefore, commission paid out of the profits for the period 1.6.2008 to 31.03.2009 is unsubstantiated. He submitted that here too, once the learned CIT(A) has noted that this sum was part of remuneration paid by the assessee to Sh. Anshuman Magazine for which, waiver of cost remuneration was obtained from Ministry of Corporate Affairs dated 18.7.2011, th....
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....8 crores out of which, if taxes are reduced of Rs. 11.78 crores then net surplus available is Rs. 21.70 crores against which, share of Sh. Anshuman Magazine would be Rs. 5.21 crores and not Rs. 6.64 crores and thus, even otherwise, the preposterous theory propounded by the learned CIT(A) is misconceived. He submitted that since the whole issue is covered by the order of the Tribunal and assessment framed under section 143(3) of the Act and order made in the case of Sh. Anshuman Magazine, the disallowance made is untenable. He accordingly submitted that the addition made by the Assessing Officer and upheld by the CIT(A) should be deleted. The Ld. DR on the other hand heavily relied on the order of the CIT(A). He submitted that the principle of re-judicata is not applicable to income tax proceedings and each year is different. He submitted that the Ld. CIT(A) has distinguished the orders of the preceding years and, therefore, the same should be upheld. 13. We have considered the rival arguments made by both the sides, perused the orders of the authorities below and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We fin....
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.... the Assessing Officer in the orders passed u/s. 143 (3) for subsequent assessment years from 2010-11 to 2014-15 has allowed similar commission/ incentive, therefore, following the rule of consistency, we are of the considered opinion that no disallowance u/s. 36 (1) (ii) of the IT Act is called for in the instant case. We, therefore, set aside the order of the CIT(A) on this issue and allow the grounds of appeal No. 1 to 1.3 raised by the assessee. 14. Ground No.2 to 2.3 are as under :- 2. That the learned Commissioner of Income Tax (Appeals) has further erred both in law and on facts in confirming an addition of Rs. 7,77,69,909/- on account of alleged excessive claim of remuneration. 2.1 That the learned Commissioner of Income Tax (Appeals) has failed to appreciate that disallowance pertaining to Assessment year 2008-09 of Rs. 3,04,30,061/- could not be disallowed in the instant year as no expenditure has been claimed in the instant year. 2.2 That finding that "any payment made of managerial remuneration to the Managing Director in contravention of the provisions of the Companies Act, even if waived cannot be considered to be an allowable expense und....
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....,77,69,909/-. 17. In appeal the Ld. CIT(A) upheld the action of the Assessing Officer by observing as under :- 5.4.1 1 have examined the observations made by the AO in the impugned assessment order as well as submissions made by the appellant on the above addition made. The addition made by the AO is with regard to excess remuneration paid to Mr. Anshuman Magazine of Rs. 4.73.39.848/- which relates to AY 2009-10 and Rs. 3.04.30.061/- which relates to A.Y. 2008- 09, claimed to be part of payment made to Shri Anshuman Magazine of Rs. 6,47.27.288/- relating to A.Y. 2008-09 and Rs. 6.64.64.442 - relating to the assessment year under consideration. In any case, a claim pertaining to an earlier year cannot be allowed in the year under appeal and therefore, the amount of Rs. 3.04,30.061/- relating to A.Y. 2008-09 deserves to be disallowed in case it has been made during the assessment year under consideration. As regards the other amount of Rs. 4,73,39,848/- i.e. the excess remuneration paid to Mr. Anshuman Magazine for the assessment year under consideration. 1 find that this fact cannot be brushed aside that the payment made of Rs. 4.73.39,848/- claimed by the appel....
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..... Even otherwise he submitted that the disallowance by the Assessing Officer on the basis that the assessee company failed to provide prior approval of remuneration expenses is not in accordance with law. 22. Relying on various decisions he submitted that mere alleged infractions under other statutes cannot be made a basis to make a disallowance under income tax Act 1961. He further submitted that in absence of satisfaction of conditions u/s. 40 A (2) (b) of the IT Act, 1961 disallowance made is not in accordance with law. 23. The Ld. Counsel for the assessee further submitted that the learned Commissioner of Income Tax (Appeals) has upheld the disallowance on fundamental misconception that any payment made of managerial remuneration to the Managing Director in contravention of the provisions of the Companies Act, even if waived, cannot be considered to be an allowable expense under the Income Tax Act if it was not for the purpose of business of the assessee company and was only a device to reduce the tax liability. He submitted that there is no finding of the Assessing Officer that the expenditure incurred was not for the purpose of business of the assessee. Infact, identica....
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....he competent authority though on 18.07.2011 i.e. much after the date on which such remuneration has been paid. In our opinion although the approval has been obtained after date of payment, however it will relate back to the year under consideration. Since the approval was granted by the competent authority vide letter dated 18.07.2011 for three financial at a time i.e. financial year 2007- 08, 2008-09 and 2009-10, therefore, it is wrong on the part of the Assessing Officer and the CIT(A) to hold that remuneration is not allowable since the approval has been obtained after the payment of remuneration to the concerned director. We further find that the above amount was a part of Rs. 6,64,64,442/- which was disallowed by the Assessing Officer u/s. 36 (1) (ii). However, we have already deleted such disallowances. We find there is no finding of the Assessing Officer and CIT(A) that the expenditure incurred is not for the purpose of business of the assessee. We find similar expenditure has been allowed by the Assessing Officer in the preceding and succeeding assessment years. Further the amount has already suffered to tax in the hands of Sh. Anshuman Magazine. In view of the above discus....